Timber Sale Contracts - A Forest Owners' Perspective

February 2001

Introduction

The time has come to harvest your trees and you are expecting to receive a significant amount in return for the crop that has taken years to mature and be saleable in your target market.

Before entering a contract to sell your timber you should know the quantity and quality of the resource on offer and market accordingly. This is an important step in realising the full commercial potential of the crop.

Once a purchaser has been selected you should concentrate on documenting the arrangement to record the agreement between the parties. The agreement should always be in writing so as to clearly set out the parties intentions. Written agreements (which do not need to be complex) also encourage planning and thinking ahead which should help avoid disputes later on.

If you are presented with a contract by the purchaser for the sale of your timber, you should take time to assess whether the proposed contract addresses your requirements and what was agreed with the purchaser. You should ask the purchaser to modify the contract (before you sign it!) if this is not the case.

Often a buyer will be experienced and knowledgeable on the proposed transaction, whereas you may not be familiar with the sort of matters that should be addressed in the contract (including how these matters should be addressed) in order to protect your interests. The forest owner should consider discussing any proposed contract with a lawyer familiar in the field before signing it. The lawyer may charge you but this may be a drop in the bucket compared to the value the lawyer brings to the transaction.

Timber sale contracts

Each sale will have different variables but some provisions should normally be included in all timber sales. These include the following:

1. Identification of parties

   The parties names and contact details should be set out in the contract. Make sure the party you are dealing with exists (i.e. an incorporated company or partnership). Think about whether guarantees are needed.

2. Term of contract

   This should normally be specified so that a deadline to cutting the timber is imposed on the purchaser. Subject to the approval of the forest owner, the purchaser may be granted an option to extend the deadline if certain further conditions are satisfied.

3. Description of crop being sold

   The legal description of the land on which the crop is situated should be set out in the contract. Further, the trees being sold should be accurately described in the contract so that they are readily identifiable. If this is not adequately done then a dispute may arise as to what the purchaser is entitled to harvest for the contract price. If the forest owner chooses to sell timber by the unit then the contract should specify the units of measurement to be used and who is to carry out the measurements and where.

4. Payment

   A lump sum contract should specify how much the purchaser is to pay the vendor (including or excluding GST) for the timber and how and when payment is to be made. This also applies to a sale by unit contract except that the price per unit should be indicated in the contract instead of a fixed dollar amount. If the forest owner requires the purchaser to pay a deposit, this should also be specified in the contract.

5. Harvesting details

   The contract should specify the harvesting method to be used by the purchaser. Provisions relating to matters such as access to the crop, roading, standard of work, hours of operation, fire precautions, dealing with damage to the forest owner's property (such as replacing pulled down fences) and tidying the site at the end of the contract should be included in the contract.

6. Bond

   In some circumstances, where for instance the purchaser has onerous land reinstatement obligations, the forest owner may require the purchaser to provide a performance bond. This may take a number of forms. One such form is where a financially reputable third party (e.g. a bank) guarantees the performance of the purchaser.

7. Obtaining consents

   The contract should specify who is responsible for obtaining the resource consent(s) and any other consents or approvals required to carry out the obligations under the contract.

8. Damage to property

   The purchaser should be responsible to look after the forest owner's assets. When exercising its rights, the purchaser should also be responsible for any damage or claims to third parties. The forest owner should ensure that the purchaser acknowledges under the contract that the forest owner is not responsible for loss or damage to the purchaser's property occurring on the forest owner's land or caused from any of the crop. The purchaser should have insurance in place to recover for any such incidents.

9. Risk and Insurance

   The contract should identify when risk (i.e. who is responsible for the timber) and legal title (i.e. who owns the timber) to the timber passes to the purchaser. Usually, risk can pass on signing the contract or on cutting, but title passes on payment. On this basis it is important that the forest owner maintains appropriate insurance cover to protect its interest in the crop. The forest owner should also get the purchaser to have public liability cover and perhaps even maintain appropriate public liability insurance in its own name throughout the term of the contract to help mitigate any claims from third parties (who may be particularly persistent if the harvesting operations on the forest owner's land result in their tree crop burning to the ground!). Forest owner's should consult their insurer in considering what policies should be in place throughout the contract term.

10. Warranties

    Often the contract should provide that the forest owner is not providing any warranty as to the quality of the crop and the fitness of the crop for the purchaser's intended use or market. The purchaser may require a warranty from the forest owner that it has good title to the crop. The form of any warranties - by either party - should be looked at carefully.

11. Assignment

    The contract should stipulate whether the parties have the right to assign (or transfer) their interest in the contract to a third party (i.e. usually, the forest owner can sell the land subject to the cutting right, but should the purchaser be able to transfer its interest in the contract?).

12. Complying with law and imposing conditions

    The contract should provide that the purchaser will comply with all laws (such as health and safety laws), regulations, authorities, notices and the like relating to the performance of the contract. The contract may further provide that the purchaser is required to comply with any conditions imposed by the forest owner to safeguard surrounding forested land from any danger.

13. Default and termination

    The contract should set out procedures to deal with any default a party may make under the contract. Typically such procedures will consist of the non defaulting party serving notice on the defaulting party requesting it to remedy the default within a certain time period. If this request is not met then the non defaulting party will usually have a number of options available to it, which may (usually for serious breaches) include the right to cancel the contract and claim damages.

    The contract should also allow a party to terminate the contract where an event arises which is outside the control of the party and which makes it virtually impossible for the party to carry out its obligations under the contract (e.g. an earthquake which destroys the crop). Such circumstances are generally termed a force majeure.

14. Disputes

    The contract should provide a mechanism for determining disputes. For instance, the contract may provide that a dispute must initially be referred to a mediator or arbitrator.

15. Confidentiality

    It may be important to the forest owner (and/or the purchaser) that the details of the contract remain confidential. A clause to this effect could be inserted into the contract.

16. Entire Agreement

    If the agreement between the parties is intended to be solely set out in the contract, then this should be specified in the contract. If there are other documents that the parties consider form part of the agreement, then these documents should be referred to in the contract and attached to the contract. Either way it should be made clear in the contract exactly what documentation sets out the agreement between the parties in order to minimise confusion and dispute.

17. Notices

    For convenience and clarity purposes, the contract should formalise a procedure for serving notice on a party under the contract. This provision should set out the methods of serving notice and will clarify when a party is deemed to have notice (which may be important when a party has been given a deadline for rectifying a default under the contract).

18. Execution

    There should be a section in the contract for both parties to sign the contract. It might also be necessary to get mortgagee's consent.

Conclusion

In summary, it is important that a contract for the sale of timber is in writing, clearly sets out the agreement and deals with all important issues. Before you sign a contract, you should take time to read and understand the contract to make sure that the contract accurately reflects your requirements and what was agreed. You should not hesitate to ask the purchaser to amend the contract to bring it in line with your expectations. Finally, it may be worthwhile consulting a lawyer (preferably with experience in timber sale contracts) to provide advice to you on the proposed contract.